(Bloomberg) -- Almost no one wants to live at The Corniche, an opulent apartment complex looking out over the South China Sea. But the debt tied to its construction has proved hugely attractive for private credit investors willing to stomach the risks.
The apartments, conceived during China’s property boom by developers Logan Group Co. and KWG Group Holdings Ltd, were expected to generate HK$30 billion ($3.9 billion) in sales. Instead when completed last year, the buildings remained largely empty due to a combination of luxury prices for a subprime location and a meltdown in Hong Kong’s property market.
That left the developers desperate to repay their banks by August 25 and avoid a default. The solution lay in one of Hong Kong’s largest-ever private credit deals. A consortium including Davidson Kempner Capital Management and Pacific Investment Management Co. edged out alternative investor Ares Management Corp. to provide a $1.05 billion private loan with an interest rate nearly twice the level of the developers’ existing bonds. The original lenders will be fully repaid Thursday, said a person familiar with the transaction.
Private credit is still a fledging sector in greater China. The opportunity to participate in a marquee deal kindled intense demand. There were also major players that took a look at the deal including Singapore’s sovereign wealth fund GIC Pte. according to people familiar with the talks. The competition pushed the annual interest rate on the refinancing down to 13% from the original 15%, according to three investors who were shown the deal.
“The Corniche is a relatively easy project to refinance because it’s already constructed, making it very transparent for financiers or funds to calculate the return. The debt is secured and cash waterfall is very clear,” said Tyran Kam, head of China properties at Fitch Ratings. “All investors need to do is putting in a price assumption and make scenarios on how many units can be sold.”
Logan and KWG borrowed from 16 commercial banks to finance the luxury development in 2021, betting on an influx of wealthy Chinese buyers. The complex’s middle-class neighborhood, adjacent to a sewage treatment facility and a driving school, proved to be a difficult sell. The timing was also off with both China and Hong Kong suffering a downturn in the property market at the time the project was completed. Only 31 out of 295 units have found buyers since the developers began marketing them in 2023, according to their website. The bulk of them were sold after the developers slashed prices by almost half.
They weren’t alone in having to discount. Hong Kong’s $270 billion property rout has hit luxury developments hard. In the first half of the year, three-fourths of transactions related to properties worth more than $10 million are associated with distressed sellers, according to CBRE Group Inc.
The project’s original banks balked at refinancing the two cash-strapped developers, raising the prospect of a default. Ares offered to buy most of the syndicated loan at a 5% discount, or 95 cents on the dollar. That sparked fear among the developers that they would lose control of the project and catalyzed negotiations with JPMorgan Chase & Co.
The bank began gaging investor interest to participate in a counteroffer: a new private loan to repay the original debt. In the end, the developers received a total of $1.05 billion from Davidson Kempner Capital Management, Dignari Capital Partners HK Ltd., RRJ Capital, Deutsche Bank AG and Pacific Investment Management Co.
“The deal’s 13% yield with collateral may fit these funds’ investment threshold,” said Daniel Fan, senior credit analyst for Bloomberg Intelligence. “It also seems lenders of the new private loan are still positive on Hong Kong’s property market.”
JPMorgan and Ares declined to comment for this story. KWG did not respond to an email seeking comment and calls to their Guangzhou and Hong Kong offices went unanswered. Logan did not immediately comment when reached. GIC also did not comment.
Two weeks before the new financing was secured, however, the outcome looked far from certain for the developers. Banks were still preparing the paperwork to sell part of the syndicated loan to Ares at a loss, as they were uncertain whether the JPMorgan-arranged loan would be completed in time due to the complexity involved with multiple lenders, according to a person familiar with the transaction.
However, the consortium also received tacit support from the government. The Hong Kong Monetary Authority, the city’s de facto central bank and banking regulator, held meetings with lenders of the original syndicated loan in the past few weeks, according to people with knowledge of the meetings. The HKMA said that selling the loan to Ares would affect the refinancing position of the borrowers, one of the people said. A spokesperson for the HKMA declined to comment.
While the new loan removes the immediate threat of default, the developers still have to find buyers for the units. Hong Kong’s housing market slump is reaching its five-year mark with at least $270 billion erased from real estate values, according to Bloomberg Intelligence’s analysis.
At the center of the downturn is a steady loss of faith in the city’s role as a Asian financial hub. Real estate developers in the city have been selling residential projects at steep discounts and the luxury end has been especially impacted. A mansion was sold for HK$360 million at the end of July, just 60% of what broker originally estimated. The developers will have to strike a balance between the demands of bargain-hungry buyers and the interests of their new lenders.
“The Corniche is selling a panoramic sea view at a huge discount to luxury houses in other areas, which should give them momentum in sales,” said Vincent Cheung, managing director of Vincorn Consulting and Appraisal, a property advisory firm. “But they will treading on dangerous ground by cutting prices too much. Their lenders will likely set a limit.”
--With assistance from Kari Lindberg and Emma Dong.
©2024 Bloomberg L.P.
